Foreign Minister Stephen Smith has also lashed out at Ms Bishop, declaring her response to Israel's faking of Australian passports showed she was ''not fit to occupy a position sitting around the national security committee of the cabinet''.

Ms Bishop, the opposition's foreign affairs spokeswoman, quickly retreated from her claim. But Mr Rudd said she had broken the convention that neither side of politics speculated or commented on the operation of security agencies.

Her comments were aired in the Israeli media and will be used by Israel to reinforce its criticism of Australia for expelling a diplomat in protest at the forgery of Australian passports used in the assassination of Hamas figure Mahmoud al-Mabhouh.

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Ms Bishop's gaffe deflected some attention from Labor's mining tax trouble and will reinforce internal Liberal criticism of her performance.

In an interview with The Age online, Ms Bishop said it would be naive to think ''Israel is the only country … that has used forged passports, including Australian passports, for security operations''. When asked, ''What? We do?'' she said ''yes''.

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Later she said: ''Has Australia forged foreign passports before? You'll have to ask the Foreign Minister.'' Pressed on what she thought, she said: ''I believe that it has occurred.''

But in a statement later, she denied having told The Age online that Australian intelligence agencies had forged the passports of other nations.

''My responses were referring to the fact that forged Australian passports have been used previously … I have no knowledge of any Australian authority forging any passports of any nation.''

The government this week announced its investigations had found Israel had forged the passports. But Ms Bishop said it had not been proved. She called the expulsion an overreaction designed to curry favour with Arab nations as Australia chases a seat on the United Nations Security Council.

Mr Smith said he would not be drawn on practices of Australian intelligence agencies.

He said the issue was that a foreign intelligence service had misappropriated identities of Australians and undermined the integrity of our passport system.

''That is not something that any Australian government can turn a blind eye to,'' he said. ''What is in issue now is Ms Bishop's conduct.''

Defending the expulsion, Mr Smith pointed out that the former Howard government had expelled Amir Laty, an Israeli envoy to Australia. There were allegations at the time involving New Zealand passports.

The latest expulsion - done at short notice and while the Israeli ambassador to Australia, Yuval Rotem, was overseas - has angered Israel.

But government officials in Israel are split on whether the passports affair will cause serious damage to the relationship with Australia.

Intelligence Minister Dan Meridor, a member of the right-wing Likud Party, said relations were strong and would recover quickly ''because both sides have an interest in maintaining a close relationship, and because both countries belong to the same camp''.

Another government source, who spoke to The Age on condition of anonymity, said Prime Minister Benjamin Netanyahu also believed the issue would blow over quickly. ''Because Australia has been one of Israel's most loyal supporters over many decades, and is very understanding of our unique security situation, the [Israeli] Prime Minister does not believe this will cause any real breach between the two countries.''

But the official said there was some concern that the Australian Foreign Minister had failed to condemn Hamas, the extremist Islamic movement that controls the Gaza Strip.

Some bureaucrats also believe that if Mossad, Israel's foreign intelligence service, was behind the assassination, it had acted recklessly. ''At a time when Israel is under such pressure internationally, you have to wonder why more care was not taken not to offend our closest friends,'' said an Israeli official.